n South African Journal of Economic and Management Sciences - Measuring exchange market pressure in South Africa : an application of the Girton-Roper monetary model : economics

Volume 10, Issue 1
  • ISSN : 1015-8812
  • E-ISSN: 2222-3436



The monetary approach to the balance of payments is based on the assumption of a fixed exchange rate, while the monetary approach to exchange rate determination is based on perfectly flexible exchange rate. Girton and Roper (1977) introduced another monetary model designed to capture the properties of the managed float, where the pressure on the external position of a country is absorbed by both a change in reserves and a change in the exchange rate. This model is called the Exchange Market Pressure model (EMP hereafter). Exchange market pressure is the sum of exchange rate depreciation and reserve outflows (scaled by base money). It summarises the flow of excess money supply in a managed exchange rate regime. This paper applies the monetary model of the EMP to the South African experience with floating exchange rate and managed float systems over the period 1970-1993. We show that the EMP model is superior to the traditional monetary approach, which uses either international reserves or exchange rate as a dependent variable. Regression results show that the hypothesised effects on the exchange market pressure are confirmed, with monetary variables having strongly significant impacts. We do not find evidence of the impact of domestic real income on EMP. The variable Q, which is included to determine whether EMP is independent of its composition, is insignificant. Diagnostic tests suggest that the model is well specified and the residuals pass the typical checking.

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